HMO developments can yield some fantastic returns upon investment and it is little surprise that we are seeing more and more people enter this market. A typical Bridging Finance Solutions’ (BFS) HMO customer has already purchased a large detached property and needs to carry out a series of works, transforming the property into single living accommodation units with shared facilities and communal areas. Houses targeted by developers are often in need of significant modernisation as well as structural repairs to make the necessary changes, hence the demand for further funding.
BFS is able to bridge the value of the funds needed to improve the property and make it suitable for owner occupation. Typically we suggest a maximum six months bridging loan, ensuring clients have their exit strategy in place. Planning is critical as ever when bridging but even more so when looking at an HMO.
In some instances, valuers will not enhance the value of a property even it is has a good level of rental income due to multiple tenants. This is due to the property basically being a single dwelling and an investor may be able to get a similar property that is currently a single family dwelling close by for a lot less money. The only exception is if there have been specific works and amendments to the property to enable it to be a HMO.
HMO homework is key. For instance, a licence is required for a ‘large HMO’, which is considered five or more bedrooms and the property has at least three or more liveable floors. The council can change the criteria if they wish to control the level of HMOs and the licence is valid for a maximum of five years. Policies relating to HMO’s can vary from council to council.
Exiting, as ever is critical for any bridging development but terms can differ for an HMO. Look at the terms closely. A HMO property can realise some great returns but investors must look at the full picture and that obviously begins with financial planning. Knowing the facts from the outset is critical in making an HMO investment a successful one.
Rachel Davies, is underwriter at Bridging Finance Solutions